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The Mythology of Energy

Sunday, July 1, 1979

Dr. Brozen is Professor of Business Economics, Graduate School of Business, University of Chicago, and Adjunct Scholar, American Enterprise Institute for Public Policy Research.

The war against the automobile and against private enterprise continues. This time, it appears in the guise of a quest for a reduced international payments imbalance and freedom from coercion by the Organization of Petroleum Exporting Countries. Propaganda almost as crude and just as untruthful as that used by the Allies in World War I is the major instrument in the current MEOW (Moral Equivalent of War) campaign for expansion of taxation and government power.

The campaign uses several myths in its attempt to sell Americans on ceding more of their freedom to the central government. Here is a list of the more blatant falsehoods accepted and propagated by the opinion manufacturing establishment.

1. The world will run out of oil in the 1980s.

2. The severe international payments imbalance is caused by the high usage and high price of imported oil.

3. An oil-rooted adverse payments balance is causing the dollar to depreciate, causing import prices in dollars to rise and, as a consequence, causing inflation.

4. We are vulnerable to an oil embargo by the Mid-East countries.

5. The gasoline shortages and long lines at filling stations in late 1973-early 1974 were caused by the oil embargo in effect at that time.

6. We must reduce our vulnerability to an embargo by accumulating a one-billion-barrel stockpile of oil and by cutting energy usage.

7. The government must plough billions into government-directed energy research to save us from ourselves and from foreign powers.

One myth propagated up to the beginning of this year is no longer on the list because it has become so obviously false. It was argued that the shortage of natural gas could not be cured by price incentives and that price ceilings should be retained since the only effect of lifting the ceilings would be a "rip-off’ of consumers. Nevertheless, price ceilings were raised by Congressional action (without a windfall profits tax on gas producers). The administration is now embarrassed by a surplus of natural gas. It is urging industry to use more natural gas.

Another discarded myth is that the coal and coal transportation industries would need special governmental assistance to meet our energy needs. This, too, has been rebutted by experience since coal price ceilings expired in 1974 (with no windfall profits tax on the coal industry). A coal surplus developed following the expiration of price ceilings. The coal industry is now crying for ploughing more tax revenues into research on liquification and gasification of coal.

Myth Number One. Let us take the myths still prevalent and examine each. Myth number one is that the world will run out of oil in the 1980s. Actually, it is unlikely that we will run out of oil by the 2080s. There is, in the free world today, a 36-year supply of proven reserves already staked out and producible at today’s prices.

The number of years’ supply of proven reserves is at the highest level in the history of the statistic. Traditionally, proven reserves have ranged from fifteen to thirty years at contemporaneous rates of oil use. Moreover, the statistic is only indirectly related to the actual amount of oil existing underground in the world, and even the direction of the relationship is unclear, because exhaustion of prospects produces a rise in price, and hence makes previously worthless reserves worth "proving."

How much more oil remains to be discovered that is producible at today’s prices is unknown. Geologists’ estimates range from a low of a twenty-year additional supply to a high of fifty years.’

Taking the lowest estimate, today’s real prices need not change for the coming half century to induce a supply of petroleum sufficient to meet all demands. At prices 50 percent higher than today, producible reserves in sight more than double. It would become worthwhile to use the enormous shale oil deposits in Colorado, Utah, and Wyoming. Of the 1.87 trillion barrels of oil in shale, 600 billion are recoverable at the higher price. That is enough to supply us for another 100 years. There are also staggering reserves available in the Canadian Athabasca tar sands and the Missouri, Kansas and Oklahoma tar sands which would become economically workable at the higher price.

In addition, secondary and tertiary recovery of the oil left behind in oil pools already worked could more than double known and proved reserves. Generally only one-third of the oil in a pool is recovered. The other two-thirds is left in the ground because it is too costly to be worth recovering at today’s prices. A rise in price would make a portion of the left-behind oil recoverable. At a higher price, we could produce as much oil in the future from the already known and abandoned fields as the total amount produced in the world’s history to date.

Myths Number Two and Three. President Carter has urged the passage of a stand-by gasoline rationing program and Congress has passed mandatory automobile mileage performance standards on the ground that we must slow imports of oil to cure our adverse balance of payments and stop the decline of the dollar. If auto energy use standards do anything to the balance of payments, it will worsen it, not improve it.

If oil imports cause an adverse balance of payments or if the great increase in crude oil prices in 1974 were a cause of an adverse balance of payments, then Germany and Japan should be in much deeper trouble than we. They import all of their crude oil while we import less than half. They import all of their natural gas while we import only a small fraction. Yet their balance of payments is positive. While the dollar declined, the mark and the yen appreciated. The cause of the payments imbalance and the decline of the dollar is the string of unprecedented peacetime federal deficits since 1973.

The net result of the mandatory downsizing of the auto fleet to reduce oil imports will be more rather than less imports. An enormous capital outlay is required to do the downsizing job and to retool to produce the new models. Estimates of the cost, in addition to the usual model change costs, exceed $30 billion. That capital could save more energy if it were left available to invest in dry process kilns for producing phosphates and cement and for other energy conserving uses. The free market would do a far more effective job of allocating capital among alternative energy saving uses, including an appropriate rate of downsizing automobiles, than the government can or will do.

Myths Number Four and Five. Why did we have those long lines at gasoline stations in 1974? Was it because of the Arab embargo?

The reason for those long lines was because the Federal Energy Office allocated gasoline and gave orders to refiners as to what products they could produce. All during the period of the embargo, our stocks of gasoline, crude oil, and other petroleum products in storage kept increasing.2Crude oil was still being imported. Instead of coming from the Mid-East, it came from Canada, Indonesia, Venezuela, and Nigeria. Some came indirectly from Libya and other Mid-East countries via Curacao and the Bahamas.

The embargo made only a small difference in the volume of imports. The oil companies did a massive and heroic job redirecting world trade. Routing of oil was changed in some cases and sources in other cases. But the Federal Energy Office screwed up the works. It underallocated gasoline to metropolitan areas, such as Chicago, New York, and Washington, and it overallocated to rural areas. City residents wasted gasoline by driving far into rural areas to fill their tanks.

Are we subject to possible blackmail by embargo? The answer is a clear no! During the Arab embargo, we imported from other sources and indirectly from the Mid-East countries that were embargoing us. Libya knew its oil was coming to us, but as long as it was labeled as going elsewhere when it left Libyan ports, Libya was glad to get the revenues.

There are more alternative sources available today than there were in 1974. Mexico is now supplying us with growing amounts. Venezuela has 20 percent of its capacity shut down and available. Nigeria is a bigger producer now than it was in 1974. Dome Petroleum is starting full scale development and transportation out of the Canadian Arctic. China is now exporting oil.

Myth Number Six. We are now developing storage facilities and accumulating a one-billion barrel stockpile of oil, at a cost of $25,000,000,000, purportedly to make ourselves less vulnerable to any future embargo. The Arabs must be laughing themselves sick all the way to the bank as we turn over $15,000,000,000 to them for oil we are going to stick back in the ground (in old hollowed out salt domes).

Is it really necessary to accumulate a stockpile to reduce our vulnerability to an embargo? The answer is no! Many countries are willing to supply us if the Arabs cut us off, including some Arab countries if we cover up the fact that they are supplying us. (From the events of early 1978, we might judge the supply of Arab oil to be more secure than the supply of UMW coal. Perhaps we should question the administration’s proposals to make ourselves even more dependent on coal than we are.)

There are less expensive ways of providing a ready reserve than building a stockpile. We could drill wells in our naval reserves, such as Elk Hills, and develop them to the point where they are ready to produce. The wells could be capped but ready to produce in case of need. There is no need to pump the oil above ground, develop underground storage, and stick it back into the ground. Let the oil remain in natural storage at no cost. Have the wells ready to go when the need arises. The cost would be far less.

Myth Number Seven. Finally, we come to the myth that the government must plough billions of dollars into energy research if the new technology is to be developed to provide the energy we need when oil runs out in the 1980s. First, let’s recognize that a shortage is a business opportunity. If anything in demand is likely to run short, its price will rise. Anyone developing a substitute or an additional supply will find plenty of eager customers.

With the increase in the price of home heating fuels, suppliers began offering automatic damper controls which cut the use of fuel by 20 percent. When fuels were cheap, it was not economic to install automatic damper controls; they could not pay for themselves. The capital it would have taken to produce them was more productive in producing gas than in saving gas. Production of the controls would have been a waste of metal, plastic, and workers’ time. These factors of production were conserved by the more efficient expenditure of capital on gas discovery and production.

As it became increasingly costly to produce gas, capital began to flow into damper controls where it could save more gas than it could produce. The investment now pays for itself.

The rise in the price of energy is inducing the production of energy saving equipment and of less energy intensive motors, engines, generators, cement kilns, furnaces, boilers, refrigerators, freezers, air conditioners, and water heaters. It is also attracting investment into private Research and Development (R&D) to develop alternative sources of energy, to develop techniques for secondary and tertiary recovery of oil from spent fields, and to improve methods of extracting oil from shale and tar sands. In 1975, oil companies invested $51 million in coal R&D, $38 million in developing methods for converting coal into synthetic fuels, $30 million in oil shale R&D, $9 million in tar sands R&D, $7 million in geothermal R&D, and $2 million in solar R&D.

Currently, private expenditures on energy R&D are near the $2 billion level. This may seem a pale effort compared to the $4 billion that the federal government is laying out on nuclear and solar research. But examination of past private and governmental research efforts suggests that we will get 100 times the return per private dollar in R&D that we get from the government dollar.3 The federal government has laid out $4,200,000,000 on developing a liquid metal, fast breeder reactor.* It achieved so little that it is giving up the effort.

The private market does a superior job in allocating resources to their most productive uses, including choosing among alternative R&D programs, than the government does.5 If the government wouldn’t try to do so much, we would get more accomplished, and energy would be more plentiful than it is now.

3"Much of energy research and development activity, such as the aggressive coal gasification •programs, falls in the category . . . [of] policies that have little social value and great social cost." Edward J. Mitchell, U.S. Energy Policy: A Primer (Washington: American Enterprise Institute, 1974), p. 72. Also see Price L. Petersen, A Critique of Two Assessments of the Synfuels Commercialization Program (Washington: American Petroleum Institute, August 8, 1977), p. 72.